Mitie problem points to industry trouble

Ruby McGregor-Smith’s resignation as chief executive of Mitie has renewed scrutiny of the parlous state of Britain’s outsourcing companies following successive profits warnings in the industry.

Ms McGregor-Smith insisted that her decision to step down after a decade in charge of Mitie was simply because being “the head of a FTSE-listed company is a tough gig”.

But the timing of her move has caused questions about the fortunes of Mitie and rival government contractors such as Capita, and point to the challenges ahead for her successor Phil Bentley, the former chief executive of Cable and Wireless Communications and British Gas.

Britain’s economy has held up better than expected since the June vote by Britain to leave the EU, but companies have blamed the vote for a slowdown in new contracts being signed off.

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Running a low-margin outsourcer will be a tough gig, says Jonathan Guthrie

Analysts worry that outsourcers have been ill-prepared for a Brexit-induced slowdown in investment decisions after being hit by the increase in the minimum wage and the coalition government’s determination to squeeze more out of their private sector suppliers.

Kean Marden, analyst at Jefferies, says that “painting problems with the Brexit brush is convenient but not really the entire truth”.

“Outsourcing is a difficult space to be in,” Mr Marden says, adding that the government contracting market remains hamstrung by political uncertainty, which started with a more traditional pause in contracts ahead of the general election last year.

Mitie’s latest profit warning in September blamed the impact of government spending cuts on its property maintenance and nursing home care businesses. It lost nearly a quarter of its £1bn market value after shares sank on the day.

Worryingly for investors in the sector, Mitie is not the only company to suffer in post-Brexit-vote Britain. A week after Mitie, FTSE 100 rival Capita was also forced into a profit warning, sending shares crashing 27 per cent and forcing the company’s market value down by almost £2bn to £4.4bn.

Mitie and Capita are particularly vulnerable to any Brexit-induced hiatus in new work as the most UK-focused of the London-listed outsourcers even if they operate different business models.

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Capita is focused on higher margin, white-collar work such as the management of complex IT systems. Mitie’s business is weighted towards blue-collar, low-margin jobs such as cleaning, pest control, social care and maintenance for social housing, putting it under pressure because of the rise in the minimum wage.

But Stephen Rawlinson, analyst at Applied Value, says the two warnings highlighted the end of an era of “pretending life was as good as it was up to 2008” when the UK outsourcing market first began to slow, forcing companies to look overseas for growth.

Other factors have contributed to issues at the two groups outside a Brexit slowdown, with Capita also suffering from a series of problem contracts, including a botched IT upgrade to London’s congestion charging system that meant it had to pay Transport for London for delays to the job.

Phil Bentley, incoming Mitie chief

Robin Speakman, analyst at Shore Capital, says that spending delays linked to the referendum may have brought problems to the surface that had already existed at Capita. There are “longer-term chickens coming home to roost, which clearly the Brexit issues may have accelerated”, he says.

Mr Speakman questions Capita’s strategy of growing through acquisition, a tactic that contributed to the crisis faced by rival G4S last year. Capita’s chief executive Andy Parker has also acknowledged that its workplace recruitment business has not kept up with new technology, while on the London congestion charge, delivery “wasn’t up to the standard we’d expected”.

There is a Brexit silver lining for some outsourcers, however, especially those that are less dependent on the UK given the sharp fall in sterling.

Although the warnings have set off alarm bells for investors in other outsourcing companies, Mr Marden says G4S and Serco should benefit from devaluation of the currency as a result of their larger geographical footprints. Both companies have shrunk their UK business in the wake of a scandal concerning electronic tagging.

Babcock is also seen by analysts as better protected owing to its focus on defence, which tends to mean secure 20-year contracts. Mr Marden points to potential new work, including the outsourcing of the Ministry of Defence’s fire and risk defence business, which has been delayed but is due to come to market within months.

Mr Bentley will hope that Mitie can also start winning new contracts even as he evaluates its existing business.

Shares in the group rose more than 2.5 per cent on Monday on hopes that he can lead a turnround. But he might find that there are more immediate challenges, with further departures possible if Ms McGregor-Smith’s tightly knit team decides to follow her lead.

Phil Bentley takes on Mitie challenge after stint in the Miami sunshine

If Mitie were looking for a different style of leadership after the exit of “Prickly Peer” Baroness McGregor Smith, then Phil Bentley is perhaps a surprising choice, writes Nic Fildes.

Because “prickly” was exactly the word used by Sir Richard Lapthone, former chairman of Cable & Wireless Communications, to describe his former charge. Last year, he told the Evening Standard that Mr Bentley, who had just sold CWC to Liberty Global, was “far less prickly than when he started”.

“Difficult” was another adjective used by Sir Richard to describe the 57-year-old Mr Bentley who, in the years he ran the British Gas business for Centrica, became the public face of price increases. He insisted it was important that he defended the price rises, even in a TV grilling from the BBC’s Jeremy Paxman, so that his workers were protected from public outrage.

The Oxford graduate and Harlequins rugby fan, who started his career as a BP trainee, left Centrica in 2013 when he missed out on the top job.

It was then that he moved to Miami to run the residual Cable & Wireless business. He bluntly argued that it could be done better and became known for a combative approach, at one point gatecrashing a conference in the Caribbean when he discovered that rivals planned to attack his business in front of government officials.

The sale of Cable & Wireless called time on what was once considered one of the best jobs in telecoms given its networks in sunny, idyllic locations. Bristol, the headquarters of Mitie, is a long way from Miami and Monserrat, but few expect Mr Bentley to change his approach after his stint in the sun.